10 ★ FINANCIAL TIMES Thursday8 August 2019Are digital coins such asFacebook’s
Librasecurities that should be subject
to Washington’s supervision or
currencies that should be left alone?
The Canadian messaging appKik
wants to drag the question into the
open via its token. It may illuminate
the US regulator’s position but it is
unlikely to be popular.
Kik has the sort of fraught
relationship with regulators that
Facebook executives are desperate to
avoid, but it has far less to lose. The US
Securities and Exchange Commission
sued Kikfor conducting a $100m
initial coin offeringin 2017 without
registering with the regulator, declaring
that the tokens were marketed as an
investment opportunity and were
securities. Kik’sresponse, published
yesterday, rejects this. Its founder and
bossTed Livingstonhas claimed he is
excited to take on the SEC in court.
In the early 2010s Kik wasseen as
one of the cooler ways for teenagers to
find their friends. Then Facebook
bought the rival messaging service
WhatsAppand the app’s growth
withered and losses rose. In 2017 Kik
raised$100m through the sale of digital
tokens called kin, just as ICOs hit their
peak. Kik said it imagined kin would be
incorporated into the messaging app
and used to make purchases and that
its value would rise as it was used.
Ten years after bitcoin arrived, the
SEC’s approach tocryptocurrencies is
hazy. Some worry the US will lose its
place as the centre of finance if it takes
a hard line against innovation, others
that it will allow scams to flourish.
Complicating matters, thedefinition of
a security rests on a 1946 case linked to
oranges. Chairman Jay Clayton said last
yearthat all ICOs he had seen were
securities yet enforcement action has
been taken against relatively few.
A court may come up with a
definition of tokensthat clarifies which
are considered securities. But it is clear
the SEC is still deciding its position.Cryptocurrencies/SEC:
Kik-startFacebook is likely to prefer quiet talks
to a brawl. For crypto advocates, Kik’s
battle could be counterproductive.“Lower for longer” sums up the
interest rate outlook for Europe’s
struggling economy. The buzzwords
also capture prospects for European
bank shares. Second-quarter results
from Italy’sUniCredit, Germany’s
Commerzbankand ABN Amroin the
Netherlandsrevealed scarsfrom loose
eurozone monetary policy. European
bank stocks, already a third lower than
a year earlier, lurched down again.
Earlier this year, the case for buyingEuropean banks:
the low downEuropean banks was that profitability
would rebound. Lower interest rates
and burdensome regulation had put
them at a disadvantage to US rivals.
European banks trade at fractions of
their tangible book value.
Commerzbank is at only a third. But
optimists believed higher rates would
boost margins on lending and deposit
taking. Commerzbank’s presentation
helpfully included a chart showing the
impact of rates rising a percentage
point (net interest income up €500m,
or a 10th, in the first year). How quaint.
Banks’ finance directors rush to
explain they long knew borrowing costs
would head in the opposite direction.
Effects vary by bank and by how well
finance directors hedged. Mortgages
are on flexible rates in southern
Europe, inflicting pain on banks faster.Dutch and German home loans tend to
have fixed rates, so the agony is drawn
out. But lower rates erode margins on
their client deposits. Ordinary clients
cannot be charged negative rates, so
are in effect subsidised.
Whatever the mechanics,
profitability will fall. ABN Amro still
managed 13.6 per cent returns on
equity. Beating 10 per cent is tougher.
Consolidation would be an escape
route. Commerzbank’s talks with
Deutsche Bank collapsed in April. But
depressed share prices make
shareholders warier and increase the
cost of raising capital for acquisitions.
In banking’s version of Darwinism,
stronger banks will pick off weaker
rivals. Shareholders hoping for a
bounceback should lower their
expectations for longer.The New York Times relies on the trust
of its readers. That has taken a minor
hit. Some subscribers objected to the
headline “Trump Urges Unity Vs
Racism” following mass shootings.
They said the famous US newspaper
had been too soft on a president with a
coarse line of rhetoric on race.
In the past two years, shares of the
New York Times Companyhave
doubled as investors backed the
expensive transformation of the
publication into a digital media
powerhouse. That article of faith took a
hit yesterday when the stock dropped
more than a tenth. The group reported
a second-quarter revenue increase of
5 per cent year on year. Direct
production costs have jumped by more
than twice that.
The number that the New York
Times Company would like
shareholders to focus on is digital-only
subscriptions. These now total nearly
4m and are a third higher than a year
ago. Digital subscription revenue in
that timeframe is, however, up by only
14 per cent. Digital advertising, while
growing, remains modest.
What spooked shareholders the most
yesterday was an admission that third-
quarter ad revenue growth will turn
sharply negative.
Weak advertising has killed off many
well-known titles in recent years. The
bulwark for the likes of the New York
Times has been digital subscription
revenue. Growth has been driven by
promotional activity.
The game is to retain new
subscribers on full-freight terms but
also to achieve mass franchise scale in
other areas too, such as events. In this
way, fixed costs are distributed across a
wide base.
The New York Times wants to reach
10m subscribers by 2025. It currently
has 4.7m. That goal is still reasonable.
However, the profitability of the
underlying business may be shakier
than expected. Investors who pay
20 times forward ebitda are showing
greater trust in the newspaper than
some readers currently have.The New York Times:
headline riskMuddy Waters’ attack onBurford
Capitalmay rank as the most
devastating so far by a short seller
against a large UK-listed company.
Shares in the litigation funder had
collapsed about 50 per cent yesterday.
That leftNeil Woodford, the fund
manager with the reverse Midas touch,
nursing a £119m loss he could not
afford. Former protégéMark Barnettat
Invesco took a £237m hit, according to
S&P data.
Muddy Waters — as US hedgie
Carson Blockis known — is not the first
to flourish a red flag over Burford’s
aggressive accounting.Lex and broker
Canaccord have separately pointed out
that soaring paper profits were riskily
dependent on Burford’s upward
revaluation of ongoing legal cases. It
was Mr Block’s formidable reputation
and the thoroughness of his critique
that pulled the rug on a business once
valued at more than £4bn.
The share slump lends weight to the
theory that a speculative bubble had
inflated, and may now be popping, in
the UK and US litigation businesses.
Investors fleeing depressed bond and
share yields have been pumping cash
into alternative assets. Litigation funds
have been a hot new theme.
The big risk is that weight of money
will force fund managers to invest in
cases that are hard to win. The
problem was illustrated by a disastrous
foray into industrial injury cases by
Quindell, another star of the Aim
market, whose stock collapsed in 2015.
Burford is a much fancier operation
thanQuindell— it is, for example,
chaired by former Barclays bossPeter
Middletonand audited byEY. Its
accounting methods appear perfectly
permissible. But Burford’s numbers
should make investors feel queasy for
the same reason Quindell’s did. Profits
rose 41 per cent to $231.4m in the first
half. But $33m flowed out of the
business. Burford has not produced
positive operational cash flow since
2013, according to S&P data.
The company has made up for this
by borrowing. Net debts stood at
$400m at the last record date. That
would be a lot more comfortable if
forecast 2019 ebitda of $352m did not
assume a big slug of paper profits.
Burford has briefly rebutted MrBurford/Muddy Waters:
court shortBlock’s claim it is “an accounting
fiasco”. A more detailed riposte is
needed. Investors in other litigation
funds should ask whether they face a
hit as bad as the one just taken by
Mr Woodford.CROSSWORD
No. 16,240 Set by ORENSE
JOTTER PAD
ACROSS
1 Switches bottle, needing no
answer in case of shingles (8)
6 Son has no trousers (6)
9 Student coming in almost last,
drunk (6)
10 Rent during course is a risky
game (8)
11 Planning a near orbit must be
an anomaly (10)
12 Put back time trial (4)
13 O colour initially in fixing
drain (6)
15 Illustrates old stamps (8)
18 Cooks must cross a road for
high-flying workers (8)
20 Talk a little about a remedy
for acid (6)
21 Lead shot originally used with
pitch (4)
23 Such vehicles bear the marks
of battle (6,4)
25 Architectural feature may be
obstacle having ignored first
two letters (8)
26 Taxi working to load right
element (6)
27 Withdraw toll applied to
soldiers (6)
28 Reaction of revolutionary
press on right of choice (8)DOWN
2 B-lister’s harangue at person
performing priestly duties? (9)
3 Express’s topless spread (5)4 Duck slime? Smoother! (9)
5 Help in mass, for example (7)
6 Reject incentive, and without
cover (5)
7 Amazed when lorry gets both
of us on board (9)
8 Equipment best uncovered for
so-called planes (5)
14 Gamble supporting company
fight showing lack of courage
(9)
16 Customs may see a bit of
drama cutting costs (9)
17 Mad English composer touring
carnival venue (9)
19 Person who looks small –
tinker? (7)
22 Subject of note crossing
border (5)
23 What’s left of building after
the end of this inferno? (5)
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7($&+(5 <,(/'('Solution 16,Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lexTwitter:@FTLexSocieties typically progress from
feudalism, where a king rules
through powerful barons, to
centralised government. Swiss
commodities groupGlencoreis
halfway there.Peter Freyberg,
newish head of the industrial
division, popped up on a half-year
earnings call to defend mining
practices. Copper bossTelis
Mistakidisretired in December.
In-house oil baron Alex Beard went
in June.
The old king — chief executive and
9 per cent shareholderIvan
Glasenberg— still occupies his
throne. But he is becoming less
reliant on the dwindling band of
billionaire commodity traders he led
through a 2011 initial public offering.Mr Freyberg was promoted to give
mining proper managerial oversight.
That may comfort some shareholders.
Others will ask why problems persisted
so long. US authorities are probing
Glencore’s alleged connections with
corruption in Africa and Latin
America. The group has meanwhile
reported a worrying number of
workplace fatalities, 11 in six months.
According to Reuters, 43 illegal miners
unaffiliated with Glencore also died at
one of its facilities in June.
It is important for the industrial
division to behave well and perform
well. It accounts for 80 per cent of
earnings.
A host of operational issues at its
African copper mines got the blame for
first-half ebitda dropping almost athird. Most of the 11 deaths occurred
at Mopani, a deep underground mine
in Zambia.
If high returns were a main reason
to mine in Zambia and the
Democratic Republic of Congo, it has
not worked. Mutanda, a cobalt mine
in the lawless DRC, will be suspended
partly due to low prices.
A boost to the output of copper and
nickel in the second half might well
salvage full-year results. Analyst
estimates of over $5bn of annual free
cash flow in years to come should
more than cover the dividend. But
with Glencore still dependent on coal
earnings, and a US investigation
pending, pressure remains on
longstanding bosses, including Mr
Glasenberg, to retire.FT graphic Sources: Glencore, BloombergGlencore’s African copper mines are the problem
Mine costs (cents per lb)
(guide) (H )
(revised)All mines
Excluding AfricaGlencore FTSE All World Mining IndexGlencore has not been able
to reduce fatalitiesGlencore versus the sector
Number of fatalities at Glencore’s
managed operations
-
-
-
(H ) Glencore: the barons’ long goodbye
Glencore has had operational issues at its African copper mines this year, which have elevated its mining
costs for the red metal well above expectations. Africa was where most fatalities occurred in the first half, a
source of angst for this FTSE 100 company. No wonder its share price has trailed peers.
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